AustLII Home | Databases | WorldLII | Search | Feedback

Journal of Australian Taxation

Business and Economics, Monash University
You are here:  AustLII >> Databases >> Journal of Australian Taxation >> 1999 >> [1999] JlATax 25

Database Search | Name Search | Recent Articles | Noteup | LawCite | Help

Black, Warren --- "Tax Implications to Native Title Holders of Compensation Payments" [1999] JlATax 25; (1999) 2(5) Journal of Australian Taxation 344


By Warren Black

This article looks at the tax implications to native title holders of compensation payments made under the Native Title Act, either by a Federal Court determination or pursuant to an out-of-court settlement which is registered as a Federal Court determination.

It particularly examines whether the payments will be taxable as ordinary income or as a capital gain, as well as giving a brief overview of native title and the compensation procedures.


This article looks at the tax implications of compensation payments payable under the Native Title Act ("NTA") for extinguishment, impairment, diminution or other effect on native title for acts subsequent to 31 October 1975, whether before or after 1 January 1994.[1] It will focus on compensation paid as a result of determinations made by the Federal Court,[2] as opposed to commercial agreements entered into by native title holders and grantee parties (eg, mining companies).

Before commencing, it should be noted that on 13 February 1998, the Treasurer announced amendments to the income tax law which would exempt from income tax compensation payments made in respect of extinguishment of native title, regardless of the form in which they are received,[3] while compensation payments made in respect of non-extinguishment of native title will be subject to a 4% withholding tax.[4] According to the Treasurer, these amendments would operate prospectively from the date of Royal Assent, and

would be presented to Parliament after the amendments to the NTA were enacted.

The effect of these amendments, if enacted, is that my analysis will only be relevant for negotiated agreements entered into up to the date of Royal Assent. However, there is no certainty that the amendments will still go ahead. Despite the enactment of the NTA amendments on 27 July 1998, there have been no indications of when, if ever, the amendments will still proceed, as no Bill has been presented to Parliament at the time of writing. Furthermore, the advent of the goods and services tax and tax reform makes it even less likely that the amendments will ever eventuate.

The effect is that income tax and capital gains tax ("CGT") issues for native title compensation payments remain very relevant, and accordingly, will be considered in this article in some detail. But before doing so, we must firstly examine the nature and content of native title rights at common law and under the NTA, as well as the procedure and methods for paying compensation under the NTA.


2.1 Recognition of Native Title

In Mabo No 2,[5] the High Court held on a 6:1 majority[6] that native title existed in Australia at common law, and was not extinguished by acquisition of sovereignty in 1788 by the European settlors. They defined native title as the communal, group or individual rights and interests of native title holders where these rights and interests arise from their traditional laws and customs, and by those laws and customs, have a connection with the land.[7]

2.2 Extinguishment of Native Title

In Mabo No 2, although recognising that native title could be extinguished, a 4:3 majority held that extinguishment could only occur by either a plain and clear legislative intention by the Government or by an inconsistent land grant.[8]

The NTA has followed the common law to some extent. However, in relation to whether native title is extinguished, the NTA has distinguished between acts occurring before 31 October 1975,[9] acts occurring (or deemed to have occurred) before 1 January 1994 and acts occurring on or after that date. This is discussed further below.

2.3 Content of Native Title

In Mabo No 2, the majority concluded that the nature and incidents of native title are ascertained according to the traditional laws and customs of the indigenous people who, by those laws and customs, have a connection with the land.[10]

As the traditional laws and customs of communities are so diverse, there is much uncertainty as to the exact content of native title. But, for the purposes of this article, I will confine my analysis to the key features of native title.

2.3.1 Extent of Interest in the Land

The content of native title varies according to the extent of the interest of the individual, group or community. Individuals, through their family, band or tribe, may be entitled to only a limited use of land,[11] while by contrast a community may have title which is practically equivalent to full ownership (that is, the right to possess and occupy the land and exclude others).[12]

The important point is that native title is a unique interest and does not confer full beneficial ownership of the land.[13] Furthermore, it can only be alienated to the Crown or in accordance with the native title holders' traditional laws and customs.[14]

The NTA applies similar principles, except that in determining compensation and the validity of acts affecting native title, it treats native title as akin to freehold.[15]

2.3.2 Nature of Connection Needed

In Mabo No 2, it was accepted that physical presence, or even a nomadic lifestyle, was sufficient to show the relevant connection with land or waters.[16]

In relation to a spiritual connection with the land, although this was not expressly considered in Mabo No 2, there were indications that this was insufficient,[17] although subsequent decisions have left open the possibility of a spiritual connection.[18] Furthermore, a spiritual connection would probably suffice under the NTA, as the NTA does not expressly require a physical connection with the land.

2.4 Availability of Compensation for Wrongful Extinguishment or Impairment of Native Title

In Mabo No 2, a 4:3 majority[19] held that no compensation was payable at common law for wrongful extinguishment or impairment of native title, without expressly considering whether it was payable under the Racial Discrimination Act 1975 (Cth) ("RDA").[20]

This created uncertainty as to when compensation would be payable as the RDA only applied from 31 October 1975 onwards. The NTA resolved this uncertainty by determining that the availability of compensation would depend on the type of act and when the act occurred:

1. Acts before 31 October 1975. Such acts are not covered under the NTA and no compensation is payable.

2. Acts between 31 October 1975 and 31 December 1993[21] inclusive. Such acts are automatically validated,[22] subject to payment of compensation for extinguishment or impairment of native title.[23] They are called "past acts".[24]

Acts after 31 December 1993.[25] Such acts are not automatically validated but instead, the Government must undertake certain processes and pay compensation in limited circumstances.[26] These are called "future acts".[27]

I will examine categories 2 and 3 in more detail.[28]

2.4.1 Acts Occurring Between 31 October 1975 and 31 December 1993 Inclusive

These are essentially legislative acts[29] or executive grants[30] by State, Commonwealth or Territory Governments between 31 October 1975 and 31 December 1993[31] which affect native title.[32] Such acts can either extinguish or impair native title, depending upon the category of act.[33]

Acts which would extinguish native title are:

1. Wholly extinguish native title. Freehold grants, certain leases[34] or public works in some circumstances.[35]

Extinguish native title only to the extent of any inconsistency. Leases, not including mining leases or leases under 1, eg, a community centre lease.[36]

Acts which would not extinguish native title are mining leases[37] and all other acts not referred to above.[38] They merely suspend the operation of native title to the extent of any inconsistency for the period of the act.[39]

2.4.2 Acts Occurring After 30 June 1993 or 31 December 1993

These include essentially legislative acts or executive grants by State, Commonwealth or

Territory Governments after 31 December 1993.[40] Such acts are permissible[41] and valid[42] if they treat native title holders in the same way as they treat freehold.[43] A good example of such an act is the grant of a mining lease over land subject to native title where it could have been granted over freehold.[44]

Such acts do not usually extinguish native title but rather, impair or suspend it to the extent of inconsistency.[45] The only exceptions are :

1. Compulsory Acquisitions. Although the acquisition doesn't extinguish native title, acts performed to give effect to the purposes behind the acquisition may extinguish native title.[46]

Negotiated Agreements. The NTA allows native title holders to enter into agreements to surrender native title in exchange for consideration.[47]

2.4.3 Obtaining Compensation Under the NTA

(a) Entitlement to Compensation

1. Compensation for validation of acts before 1 July 1993 or 1 January 1994

Entitlement to compensation depends upon the act in question:

1. Extinguishment. If the act extinguishes native title, affected native title holders are automatically entitled to compensation.[48]

2. Non-Extinguishment. If the act does not extinguish native title but only suspends it, affected native title holders are entitled to compensation as follows:[49]

(a) Offshore Acts. Compensation is payable.

(b) Onshore Acts. Compensation is only payable if the act was racially discriminatory, that is, it could not validly have been done to freehold without compensation. A good example is the grant of a mining lease over land subject to native title which could not have been granted over freehold without paying compensation to affected parties.[50]

2. Compensation for validation of acts on or after 1 July 1993 or 1 January 1994

Similar principles apply as per 2. Compensation is payable for offshore acts,[51] or onshore acts which are racially discriminatory[52] which extinguish[53] or impair native title, unless they are an act which have an insignificant impact on native title, eg, beekeepers licence.[54]

(b) Determining Compensation

Native title holders are entitled to compensation in accordance with Div 5 of the NTA. This Division makes compensation payable on just terms to native title holders for any loss, diminution, impairment or other effect of the act on their native title rights and interests.[55]

In assessing compensation, where the act involves a compulsory acquisition, or affects native title in such a way that compensation would have been payable under any law if it had affected ordinary title,[56] the court may have regard to the principles or criteria of that law in determining compensation.[57]

(c) Payment of Compensation

With acts before or after 1 January 1994,[58] compensation is paid by the Commonwealth,[59] State or Territory,[60] depending upon to whom the act was attributable.[61] The NTA also allows the Commonwealth, State or Territory to put the compensation burden on a third party.[62]

Compensation must be paid in money,[63] subject to the ability of native title holders to request non-monetary compensation to be transferred, or goods and services provided in substitution for compensation,[64] which will satisfy their right to compensation.[65] Furthermore, although the Federal Court can only award a lump sum,[66] the parties may reach agreement for native title holders to receive ongoing payments.[67]

(d) Procedure to Obtain Compensation from the Federal Court

To obtain compensation under Div 5 of the NTA, the applicants must apply to the Federal Court for a determination of compensation.[68] After referring it to the Native Title Registrar,[69] if the Registrar accepts the application,[70] the Registrar must give notice to a number of affected parties.[71] The parties then have 3 months to oppose the claim by lodging a native title claim or applying to become a party.[72] The determination made depends upon what happens next:

• If the application is unopposed and the Federal Court is satisfied as to certain criteria - the Federal Court may make a determination in, or consistent with, the terms sought by the applicant.[73]
• If the parties advise the Federal Court they have reached agreement at any stage of the proceedings - provided the agreement meets certain conditions, the Federal Court must make a determination consistent with the agreement.[74]
• If no agreement is reached - the Federal Court may refer the matter to the National Native Title Tribunal ("NNTT") for mediation.[75] If mediation does not achieve agreement, the Federal Court can order mediation to cease[76] and make a determination of native title and whether compensation is payable. If so, the order must set out the people entitled to compensation, the method used in determining the compensation entitlement, and the method for determining any dispute as to entitlement of any person.[77]

(e) Negotiated Compensation Agreements

The NTA also makes provision for native title holders to negotiate compensation with the relevant government or grantee parties. This can be done in a number of ways :

1. Out of Court Agreements

Native title holders can reach agreement with the relevant government or grantee party as to the terms of a native title determination to be made by the Federal Court by mediation[78] or by settling out of court at any stage of the proceedings,[79] and have the agreement registered as if it was a determination of the Federal Court.

2. Individual Agreements outside the Act

Parties may also enter into individual agreements outside the NTA, the only difference to Point 1 above being that the agreement will not be registered as a determination of the Federal Court. Such agreements have been the most common form of agreement reached to date in the mining industry with native title holders or claimants.[80]

3. Indigenous Land Use ("ILU") Agreements

ILU agreements are not determinations of the Federal Court but are agreements registered with the Native Title Registrar on the Register of ILU Agreements. They allow the Government and native title holders/claimants[81] or registered native title body corporates[82] to enter into agreements authorising extinguishment of, or a wide range of activities in respect of, native title rights and interests[83] in exchange for consideration.[84] Such agreements can be for any consideration, including freehold grants or other interests in land.[85]

4. Right to Negotiate Agreements

Native title claimants and holders are granted a right to negotiate with respect to certain acts on or after 1 January 1994. The right to negotiate provides extended consultation rights, along with a temporary right of veto with respect to the acts.[86]

Until recently, the right to negotiate was very significant. It covered all proposed mining tenement grants at both the exploration and production stage, as well as most compulsory acquisitions by governments for development or infrastructure purposes. As a result, there were significant delays in granting mining tenements, resulting in a large number of compensation agreements being negotiated between governments, mining companies and native title claimants.[87]

However, the July 1998 amendments have removed the right to negotiate in respect of mining in towns and cities, certain types of mining[88] and compulsory acquisitions of native title rights for the purpose of making grants of land to third parties for infrastructure or for the benefit of third parties in towns and cities.[89] Instead, the native claimants/holders have been given consultation rights to ensure their native rights and interests are adequately protected.[90]

Therefore, although the right to negotiate is very relevant for agreements reached to date, it will be of less significance from July 1998 onwards, particularly as the tightening of the threshold test will reduce delays.[91] In future, it is likely that agreements will be reached using the other forms of agreement discussed above.

2.5 Summary

In summary, although Mabo No 2 has recognised that native title exists at common law, the incidents and nature of native title are far from clear. It will depend on the circumstances of each case.

On the other hand, although Mabo No 2 did not reach a conclusion on whether compensation was payable under the RDA for wrongful extinguishment, or impairment or damage to, native title since 31 October 1975, the NTA ensures that compensation will be payable. The NTA validates all acts between 31 October 1975 and 31 December 1993,[92] subject to compensation being paid if the act was racially discriminatory. The NTA also provides procedures for acts after 31 December 1993 to ensure that native title interests are properly considered (or at least, compensation is paid where it would have been paid in respect of freehold).

Importantly, however, compensation is payable to native title holders under the NTA in many situations. The overriding principle is that compensation is payable to native title holders if it would have been payable to freeholders for the grant of an interest over their land.


It is to the tax consequences of the compensation in the hands of the native title holders arising from the rights to compensation under the NTA to which I now turn. I examine particularly payments made pursuant to a Federal Court determination (or deemed determination as with out of court settlements).

I will examine both whether the payments would be subject to tax as ordinary income or CGT.

3.1 Extinguishment of Native Title

3.1.1 Ordinary Income

Section 6-5(1) of the Income Tax Assessment Act 1997 ("ITAA97") includes in a taxpayer's assessble income any amounts derived which are ordinary income. As to what constitutes "ordinary income", the starting point is seen in Scott v C of T (NSW)[93] where Jordan CJ said:[94]

The word "Income" is not a term of art, and what forms of receipts are comprehended within it, and what principles are to be applied to ascertain how much of those receipts ought to be treated as income, must be determined in accordance with the ordinary concepts and usages of mankind, except in so far as the statute states or indicates an intention that receipts which are not income in ordinary parlance are to be treated as income ... (emphasis added)

In Scott v FC of T,[95] Windeyer J said, in characterising an amount as income, you must look at the quality of the receipt in the hands of the recipient. Income receipts must be distinguished from capital receipts, the latter not being assessable.

The main decision concerning compensation payments is the House of Lords decision in Glenboig Union Fireclay Co Ltd v IRC.[96] A railway company paid compensation to the taxpayer based on the value of unworked minerals because it had exercised its statutory rights to stop the taxpayer mining on its land. It was held by majorith that the payment was capital in nature. Buckmaster L said:[97]

What we must consider is not the measure by which the amount of compensation was arrived at but what it was truly paid for ...

That is, the assessability of compensation is determined by what in truth the compensation is paid to fill or replace. On the facts, as the compensation was paid for the sterilisation of a capital asset, it was not assessable income.

Glenboig Union Fireclay has subsequently been followed in many cases.[98] Applied to native title compensation payments for extinguishment of native title, the payment is clearly for the loss of a capital asset and therefore, will not be assessable as ordinary income. This will be the case regardless of how compensation is calculated, as the compensation in Glenboig Union Fireclay was calculated by reference to estimated future profits, yet it was still held not to be assessable.[99]

3.1.2 CGT

The question arises whether compensation payments for extinguishment of native title can be subject to CGT. I will consider the question both under the Income Tax Assessment Act 1936 ("ITAA36") and the ITAA97.

At first glance, it seems absurd that CGT could arise. Although native title is an asset,[100] CGT only arises for assets acquired and disposed of after 19 September 1985.[101] Native title was acquired by the original native title holders sometime on or before 1788,[102] as any determination or order under the NTA does not create native title, but merely confirms its existence at common law.

However, CGT may still arise under any one of the following grounds:

a. where native title is transferred post-1985 from one or more native title holders to subsequent native title holders, eg, upon marriage or death;[103]

b. where native title is acquired post-1985 due to a substantial change in the content of native title;

c. where the deemed disposal provisions in relation to assets held by companies apply;[104] or

d. where a statutory right of compensation arising under the NTA is subsequently disposed of.

I will consider each ground in turn.

a. Post-20 September Acquisitions Due to Marriage, Death, etc.

Native title may lose its pre-20 September 1985 ("pre-1985") status where native title holders alienate their part-interest in native title.[105] The traditional laws and customs of the native title holders usually allow alienation by marriage, succession or other means. Any of these events may result in the holders acquiring a post-1985 asset, resulting in compensation for extinguishment being subject to CGT.

For example, where a person dies post-1985 and a pre-1985 asset belonging to the deceased passes to a person under the deceased's will, that person will be deemed to acquire the asset at market value on the date of the person's death.[106] The effect is the passing of a native title interest under traditional laws of succession within a community will appear to result in the application of CGT. Although whether these provisions will be applied in practice is another issue, due to the ensuing administrative difficulties. For instance, how do you calculate the market value of a part-interest in native title where the community has over 100,000 members? How do you collect the tax in the first place?[107]

b. Post-20 September Acquisitions Due to Substantial Change in Content of Native Title

In the recent High Court decision in FC of T v Murry[108] which considered the CGT goodwill exemption,[109] a majority of the High Court left open the possibility that sources of goodwill may change so much that although the underlying business is of the same kind as previously conducted, it is no longer the same business and thus, what was originally an asset acquired pre-1985 becomes acquired post-1985.[110]

Arguably a similar analogy could be applied to native title. It is possible that in the post-Mabo era, the nature and incidents of native title may have changed so significantly that it could no longer be said to be the same asset as at 19 September 1985.[111] If so, there would be a disposal of native title on the date that the Commissioner of Taxation[112] considers there to be a new asset.

In practice, however, this may not be a problem. As well as the fact that the content and incidents of native title would not have changed much since 19 September 1985, the difficulties in determining exactly when native title becomes a new asset, as well as policy issues,[113] may result in the Commissioner being unwilling to take this approach.

c. Deemed Disposals by Companies

The CGT provisions deem a pre-1985 asset acquired by a company to be a post-1985 acquisition unless the Commissioner is satisfied that at all times after 19 September 1985 the same taxpayer(s) held "majority underlying interests" in the asset post-1985 as was the case pre-1985.[114] "Majority underlying interests" are defined[115] to mean more than 50% of the beneficial interests[116] held by natural persons (whether directly or indirectly) :

(a) in the asset; or
(b) in any income that may be derived from the asset.

It is also arguable that a community of native title holders or body corporate established under the NTA may be an unincorporated association at common law and therefore, a company under both the ITAA36 and the ITAA97.[117] The effect is that potential arises for the provisions to apply to native title communities or body corporates. That is, Mabo No 2[118] recognised that native title could devolve according to traditional laws & customs, that is succession, marriage, divorce, etc.. Although changes in the composition of native title holders due to succession are specifically exempted from the provisions,[119] there are no such provisions for marriage, divorce or devolution by other means. The effect is that if there are changes in the composition of the community post-1985, the native title will be deemed to have been acquired by the community post-1985 at market value on the date the natural persons first ceased to hold majority interests.[120]

However, as mentioned above, there are tremendous administrative difficulties in applying the provisions to native title communities. Unlike public or private companies, native title communities do not always keep records of membership, making it almost impossible to ascertain whether there has been a change in composition of greater than 50% post-1985. Therefore, if they go ahead, the proposed amendments will be welcomed by native title communities,[121] as the exemption of native title communities from CGT means that these problems only arise up to the date that the amendments receive Royal Assent.[122]

At the same time, this begs the question: why are the proposed amendments not retrospective?

d. Statutory Right to Compensation

It is also arguable that CGT arises because there is a disposal of a statutory right to compensation acquired by the native title holders under the NTA.

The problem arises because of the definition of "asset".[123] "Asset" is defined extremely broadly to mean "any form of property" and to include "a chose in action ...whether legal or equitable and whether or not a form of property" (emphasis added). A statutory right to seek compensation would clearly fall within this definition.[124] And as seen above, a right to seek compensation arises under the NTA[125] as the NTA allows native title holders to seek compensation where native title is affected.[126] Such an asset comes into existence post-1985.[127]

In these circumstances, it is arguable that compensation received by native title holders pursuant to a determination under the NTA is in respect of the disposal of a right to compensation, not native title. In Provan v HCL Real Estate Ltd,[128] Rolfe J was willing to accept that this could be the case, even though the underlying asset was disposed of in the transaction.[129] And in Zim Properties Ltd v Proctor (Inspector of Taxes),[130] Warner J accepted that compensation received for a solicitor's negligence, which had caused a contract for the sale of land to fall through and the taxpayer's property to fall in value, was assessable as a capital gain in respect of the disposal of a right to compensation, saying that one must look to the most relevant asset.

However, the Commissioner has released Taxation Ruling TR 95/35 dealing with the CGT treatment of compensation payments. In the ruling, he accepts that where compensation is received in respect of an "underlying asset" [131] which has been lost or destroyed, or permanently damaged or reduced in value, and provided there is a direct and substantial link between the compensation and the underlying asset,[132] the compensation is to be regarded as received in respect of the underlying asset, not the disposal of a right to compensation.[133]

This "underlying asset" approach has been endorsed by the Full Federal Court in FC of T v Guy.[134] Here, their Honours held in obiter dictum that a deposit forfeited by a vendor under a contract for the sale of land which had fallen through was exempt from CGT,[135] even though the property was disposed of in a separate contract immediately afterwards. I suggest that this view is not inconsistent with Zim Properties,[136] as the underlying asset was not disposed of in that case, while it was disposed of in Guy.[137]

Therefore, I suggest that native title compensation payments received for validation of pre-1 January 1994[138] acts or extinguishment of native title on or after 1 January 1994 can be linked back to the underlying asset (that is, native title). The effect is that they will be exempt from CGT pursuant to Taxation Ruling 95/35.[139]

3.2 Compensation for Impairment of, or Other Effect on, Native Title

Under the NTA, most post-1 January 1994 (and some pre-1 January 1994 acts)[140] will not extinguish native title, but will only suspend it for the period of the inconsistency,[141] eg, a mining tenement.[142] Potentially, this gives rise to different tax implications as native title is not extinguished, only impaired.

Until recently, compensation to native title holders for mining tenements resulting in impairment to native title were usually negotiated between the parties.[143] Since the amendments to the NTA on 27 July 1998, however, in future, it is likely that compensation will be obtained more frequently under the NTA procedures rather than by agreement.[144] Therefore, there is a need to consider the tax consequences for impairment or diminution of native title when the native title holders utilise the NTA procedures.

3.2.1 Ordinary Income

Similar principles apply as per extinguishment. It has been held that compensation for temporary impairment of the use of freehold or leasehold property, where the compensation is intended to cover the diminution in the value of land and damage incurred from carrying on mining operations, is of a capital nature and therefore, not assessable, even if paid in instalments.[145]

With native title, the NTA[146] specifies compensation is to be paid for loss, impairment, diminution or other effect on native title. Therefore, compensation payments awarded by a Federal Court determination[147] will not be assessable as ordinary income.[148]

3.2.2 CGT

a. Underlying Asset

We have considered the underlying asset approach in relation to extinguishment of native title.[149] Can this approach be used where native title has not been extinguished?

This is an area of much controversy, as commentators' views have ranged markedly. Some have suggested that the compensation would be in respect of the disposal of the right to compensation as there has been no disposal of the underlying asset.[150] On the other hand, the Commissioner accepts that where a pre-1985 underlying asset is permanently impaired, damaged or reduced in value, he will link the compensation through to the underlying asset, thereby exempting it from CGT.[151]

There are two possible ways to link compensation back to the underlying asset:

I will consider each in turn.

1. Permanent Impairment / Reduction in Value

The Commissioner's willingness to link compensation to the underlying asset under Taxation Ruling TR 95/35 is extended to where the underlying asset is permanently impaired or reduced in value. This is an extremely broad concession, as seen by the Ruling's definition of "permanent"[152] as "not everlasting but any damage or reduction in value which will have a permanent effect unless the taxpayer puts it right".

This concession is clearly intended to overcome potential inequities of CGT in relation to taxation of compensation payments. For example, in Zim Properties, Warner J held that a capital gain arose, even though the compensation was received in respect of the fall in value of a property due to a solicitor's negligence. And in Tuite v Exelby,[153] Shephardson J accepted that CGT arose, even though compensation was payable for the loss in value of shares. In both these situations, it is clearly inequitable that a taxpayer should be subject to tax as no "gain" has been derived. Indeed, this prompted Harper J in Carborundum Realty Pty Ltd v RAIA Architecture Pty Ltd[154] to suggest in these situations that no "real person" would apply Pt IIIA, and implied that the proceeds should be linked to the underlying asset.[155]

The question is whether this concession can apply to native title. Compensation can be paid for impairment, damage, etc. of native title in a number of ways, such as:

• impairment of access rights, and use and enjoyment generally;
• damage to the land (depending on the extent of native title); and
• spiritual damage.[156]

In all these cases, I would suggest that there is an impairment which the compensation intends to "make right". With a mining lease, for example, even if a rehabilitation condition is imposed pursuant to the Mining Act 1978 (WA), this would usually be insufficient to prevent "permanent impairment or damage" of the kind contemplated in Taxation Ruling TR 95/35 to a unique interest such as native title. Native title involves the relationship of Aboriginal people to their land. Mining will inevitably result in a disturbance to the social fabric of the Aboriginal community, and in particular, may result in disturbance of ceremonial sites of spiritual significance which can never properly be restored by a rehabilitation condition.[157] Even where there is no damage to the social fabric or to spiritually significant sites, the broad definition of "permanent" in Taxation Ruling TR 95/35[158] would suggest that damage or impairment to rights such as hunting & fishing, gathering sustenance from the land, etc. would reduce the value of, or damage, native title in some way.

Whether a strict reading of the CGT provisions allow this result is questionable.[159] However, it should be noted that in FC of T v Guy, the Full Federal Court were willing to link the compensation back to the underlying asset.[160]

Therefore, the courts may be willing to adopt an underlying asset approach, thereby ensuring that CGT will not arise in relation to compensation received by native title holders for impairment or damage to native title.

2. Part Disposal

It has been suggested[161] that where damage occurs to an asset, and the asset is not in the same condition as before the event occurred, the effect of s 160N[162]and s 160R[163] of the ITAA36 is to treat a loss or destruction of native title as a part-disposal. The effect of this approach is where native title is a pre-1985 asset, compensation for the partial loss or destruction would be exempt from CGT.

This argument may arise, for example, if native title rights extend to sub-surface minerals. If compensation is received for impairment of native title due to the grant of a pre-1 January 1994 mining lease where the minerals have been mined, it is arguable that a part disposal of native title has occurred as the land no longer has the minerals. The effect is compensation relating to the minerals would be exempt from CGT.[164]

Similar reasoning may apply to compensation for other aspects of native title. For example, where compensation is given for the loss of access rights to hunt and fish, the native title does not remain in the same condition as before the mining lease was granted and therefore, arguably there is a part disposal.[165]

Whether the Commissioner accepts this argument, however, is another question.[166]

b. Right to Compensation

If the above arguments are not accepted, as mentioned already, it could be argued that CGT arises because the compensation relates to the disposal of a statutory right to compensation arising under the NTA.

In considering this argument, I will be looking at Pt IIIA of the ITAA36. My analysis under the ITAA36 will generally be applicable to the ITAA97 with the obvious exception that the ITAA97 imposes CGT on CGT events, not acquisitions and disposals. Therefore, I will simply refer to the equivalent provisions in the ITAA97 and point out any differences from the ITAA36.

Under the ITAA36, for Pt IIIA to apply, the following elements must be demonstrated:[167]

I will now consider each element in turn.

1. Asset

As stated earlier, a statutory right to compensation is an asset under s 160A of the ITAA36.[168]

2. Acquisition after 19 September 1985

Whether the act occurs in relation to native title pre or post 1 January 1994, the right to compensation is clearly acquired post-1985 as the NTA was enacted after 1985. The difficulty is there does not appear to be any specific provision in s 160M of the ITAA36 dealing with the acquisition, that is:

Section 160M(1). This deems an acquisition and disposal when a change of ownership occurs. In my view, there is no change in ownership where an asset vests in a person without a corresponding disposal. In this situation the right to compensation vests in the native title holders by operation of law.[169]
Section 160M(6). This deems an acquisition and disposal where a person creates an incorporeal asset which invests in another person upon its creation. In this situation, the right has simply vested in the native title holders; it has not been created by a "person" but pursuant to statute.[170]
Section 160M(7). Section 160M(7) only applies if no other provisions in Pt IIIA apply, as it is specifically "subject to this Part". For the reasons given directly below, it appears there is an acquisition according to ordinary concepts.

In my view, there is an acquisition according to ordinary concepts, as there are cases suggesting that the word "acquisition" in s 160L includes acquisitions according to ordinary concepts, that is, where assets vest in the grantee by operation of law, or are acquired by the grantee without a corresponding disposal.[171] A right to compensation vests in the native title holders by operation of law.[172] The effect is an acquisition would occur under s 160L post-1985, meaning any subsequent disposal by the native title holders will result in a "change in ownership".

Under the ITAA97, the same difficulty arises. CGT Event A1 will not apply because there is no change in ownership, nor will CGT Event H2 apply if another CGT event applies.[173] However, I suggest that CGT Event C2 applies as the ITAA97 appears to allow acquisitions according to ordinary concepts, as it specifically states that as a general rule, you will acquire an asset when you become its owner.[174]

Therefore, I suggest that a right to compensation is acquired under both the ITAA36 and the ITAA97 at the time it vests in the native title holders as this is the time that the native title holders become the owner of the asset (that is, the right to compensation). As to when it "vests", this will depend on the act in question.

(i) Acts Occurring Before 1 January 1994

The preferred view is a right to compensation vests at the time of the events giving rise to the cause of action.[175] As the event affecting native title occurred between 31 October 1975 and 31 December 1993, the right to compensation will be acquired at the time that the NTA comes into operation, namely 1 January 1994,[176] as it is only at this time that native title holders are entitled to apply for compensation for validation of acts before 1 January 1994.[177]

As for the timing of the acquisition, under Pt IIIA of the ITAA36, this is determined by s 160U.[178] The problem is that there is no provision in s 160U adequately dealing with a statutory right to compensation. A solution is to look at Naval & Military Airforce Club of SA v FC of T,[179] in which Von Doussa J suggested that in this situation, you use ordinary concepts. Here, I suggest that the date of acquisition would be the date that the NTA came into operation (that is, the actual time of the acquisition).

Under the ITAA97, the time of acquisition would be determined in a similar manner as there is no specific provision dealing with this situation.

(ii) Acts on or After 1 January 1994

The timing of acquisition becomes a lot more complex for acts on or after 1 January 1994. An obvious example is the grant of a mining lease pursuant to a determination by the relevant arbitral body[180] when the parties have failed to reach agreement under the right to negotiate provisions.[181] Here, the right to compensation is clearly not acquired at 1 January 1994, as no act affecting native title has occurred at this date. The question is when is it acquired?

The NTA gives native title holders a right to obtain compensation for acts on or after 1 January 1994 which validly affect native title.[182] An act affects native title if it extinguishes or is otherwise wholly or partly inconsistent with its continued existence, enjoyment or exercise.[183] The effect is unlike acts before 1 January 1994, a right to compensation is only acquired when the post-1

January 1994 act occurs, not the date of enactment of the NTA, that is, at the time of the actual grant in respect of the land, as it is only at this point that native title is affected.

The timing of the acquisition will therefore vary depending on the act in question. With a mining lease, for example, I suggest that the grant of the mining lease will be the event that triggers the right to compensation, as native title is affected at the time of the grant.[184]

The timing will then be determined under s 160U of the ITAA36 and s 109-5(1) of the ITAA97 in a similar manner as for acts before 1 January 1994.

3. Disposal after 19 September 1985

Similar principles apply for compensation for pre- and post-1 January 1994 acts. However, whether a right to compensation is acquired at the date of operation of the NTA or date of grant, under both the ITAA36 and ITAA97, there are a few possibilities as to when the right to compensation is disposed of:

View 3 above would not appear to be tenable, as the recent High Court decision in FC of T v Orica Ltd[188] casts serious doubt on the idea that payment cannot constitute a disposal. Orica[189] supports a broad construction of s 160M(1) and s 160M(3)(b), showing that a disposal will occur either upon obtaining the judgment debt or when the judgment debt is paid.

Concerning the preferred view, I suggest that although View 1 is probably more correct on a strict reading of the provisions, View 2 above is to be preferred. The Commissioner rightly points out in Taxation Ruling TR 95/35[190] that View 1 would lead to a multiplicity of rights. Therefore, the right to compensation will cover the bundle of rights arising out of and being extinguished during the litigation process, that is, once the judgment debt is paid, the litigation process is finalised,[191] resulting in the relevant disposal under the ITAA36 (and the asset "ending" under the ITAA97[192] as it has been "released, discharged and satisfied").

As to the timing of the disposal, in Taxation Ruling TR 95/35,[193] the Commissioner considers it to be the final point of settlement of the claim, whether in the course of proceedings or by an out of court settlement. Rather ambiguously, however, he goes on to say that the time of disposal is determined by s 160U(3) of the ITAA36 to be at the time of entering into the settlement agreement and receiving the compensation. I see two problems with this view :

The effect of the above analysis would be as follows:

I submit View (b) above should be preferred. Although it is strongly arguable on a strict reading of Pt IIIA that s 160U is the exclusive provision in Pt IIIA on timing of acquisitions and disposals, as Orica is a majority judgment of the full High

Court, its decision on this matter will be binding on lower courts and must be followed. Furthermore, it is an easier approach to administer.[199]

Therefore, I suggest that under the ITAA36, the date of disposal of the right to compensation arising from a Part 3 determination will be at the time there is a change in ownership, whether there is an actual determination by the Federal Court or an out of court settlement registered as a determination.

Under the ITAA97, the position is the same, but it is slightly clearer. Section 104-25(2) specifically states that the timing of CGT Event C2 where there is no contract is when the asset ends, that is, when it is released, discharged or satisfied. For the reasons given above, this will occur when the judgment debt/compensation is paid.

4. Cost Base

Under both the ITAA36 and ITAA97,[200] various costs can be included as part of the cost base, including the following:

Looking at each in turn:

a. Consideration in Respect of the Acquisition of the Asset

Looking first at the ITAA36, s 160ZH(4) defines this phrase as the sum of amounts paid, or market value of any property other than money given, in respect of the acquisition. The question arises whether this can include damage or impairment to native title.

The problem is the words "pay or give" in s 160ZH(4), as courts have taken a strict interpretation of this phrase.[204] It is difficult to see how damage or impairment caused by pre or post 1 January 1994 acts could be consideration "paid or given" by the native title holders; it would be better described as something "incurred" or "sustained".

Therefore, I suggest that no consideration is paid or given in respect of the acquisition,[205] unless the deemed market value cost provisions in s 160ZH(9) apply. Looking at each paragraph of s 160ZH(9) in turn :

Section 160ZH(9)(a)

Section 160ZH(9)(a) does not apply where there is an acquisition without a matching disposal and therefore, will not apply to a statutory right to compensation.

Section 160ZH(9)(b)

Section 160ZH(9)(b) deems a market value cost base where the consideration cannot be valued. The meaning of this phrase is unclear and it is circular to deem a market value cost base where the consideration cannot be valued! To make sense of this provision therefore, it probably applies where the consideration paid or given cannot accurately be valued.[206]

If this interpretation is correct, I suggest that a right to compensation acquired as a result of damage to native title, which is so difficult to value on account of its unique nature, would fall within this paragraph. There is a crucial difference in the wording of s 160ZH(9)(b) and s 160ZH(4) - s160ZH(9)(b) only refers to consideration paid or given; there is no requirement of "property other than money". Indeed, it has been suggested[207] that such a loss would fall within s 160ZH(9)(b) as consideration in contract law includes only forbearance, detriment, loss or responsibility given or suffered or undertaken.[208]

If so, a market value consideration[209] would be included in the cost base.[210] Although in Taxation Ruling TR 95/35,[211] the Commissioner specifically rejects the idea that s 160ZH(9)(b) could apply to a right to seek compensation. Therefore, the matter is still unclear.

Section 160ZH(9)(c)

For similar reasons to s 160ZH(9)(a), this provision would not apply as there is no corresponding disposal to match the acquisition.[212]

A similar result occurs under the ITAA97. Damage or impairment to native title would not be "money you pay, or are required to pay" under s 110-25(2). Nor would the market value substitution rule in s 112-20 apply for the same reasons as per s 160ZH(9) (a)-(c) above.

b. Incidental Costs of Acquisition & Disposal

Section 160ZH(5) and s 160ZH(7) of the ITAA36 specifically and exhaustively define "incidental costs of acquisition" and "incidental costs of disposal". Most importantly for our purposes, they specifically include legal costs in relation to an action. Such costs are clearly incurred in connection with the acquisition or disposal as required by these provisions, as the words "in connection with" generally have a very broad meaning.[213] This is confirmed by the Commissioner in Taxation Ruling TR 95/35.[214]

Other charges such as valuation fees or other charges connected with proceedings may also constitute incidental costs, depending on the circumstances.5. Consideration/Capital Proceeds

Under the ITAA36, s 160ZD(1) defines the consideration in respect of the disposal of an asset as including:

The words "as a result of or in respect of" are regarded by the courts as having the widest possible meaning of any expression intended to convey some connection between two subject matters. Therefore, any monetary or non-monetary proprietary compensation received by native title holders will be regarded as consideration, regardless of whether the judgment debt constitutes the disposal[215] or whether the payment of the judgment debt is the disposal. This will include adjustments to compensation payments on account of CGT implications.[216]

The same result occurs under the ITAA97 as s 116-2(1) defines "capital proceeds" to include any money or property you receive or are entitled to receive.

There are also market value provisions[217] where the consideration received cannot be valued or the parties are not dealing at arm's length. However, these provisions will obviously not apply to compensation received as a result of a Federal Court determination by native title holders.

As an alternative view under the ITAA36, Harper J in Carborundum suggests that amounts received in respect of the disposal of a right to compensation are not "consideration" under s 160ZD(1) of the ITAA36, as consideration is something given by agreement in exchange for something else, not an amount received by compulsory exaction as per a judgment debt. However, this view has not been accepted by majority of commentators,[218] nor by the Commissioner in Taxation Ruling TR 95/35[219] and is unlikely to be followed.

c. Apportionment

The NTA requires the Federal Court to provide a break-up of the heads of compensation awarded to native title holders.[220] What happens if native title holders receive compensation partly for a permanent impairment or part disposal of native title and partly for something else (eg, the right to seek compensation)? Can apportionment of the consideration/capital proceeds and/or cost base occur?

1. Consideration/Capital Proceeds

Section 160ZD(4) of the ITAA36 and s 116-40 of the ITAA97 specifically allow compensation paid or given in respect of a transaction which only partly relates to the disposal of a particular asset to be apportioned so that only the consideration/capital proceeds reasonably attributable to the disposal of that asset will be attributed. This is confirmed in Taxation Ruling TR 95/35[221] where the Commissioner requires the taxpayer to allocate the compensation receipts between the relevant assets.[222]

2. Cost Base

Under the ITAA36, although there is no problem apportioning incidental costs as they specifically include only expenditure "to the extent to which it was incurred",[223] there is no specific provision allowing apportionment for the consideration in respect of the acquisition of the asset. Arguably however, s 160ZH(4) would allow for apportionment in this situation by the words "in respect of".[224]

Under the ITAA97, this problem does not arise as s 112-30(1) and s 112-30(1A) allow apportionment for both heads.

As to the most appropriate basis of apportionment, the Commissioner in Taxation Ruling TR 95/35 uses the amount of compensation eventually received.[225]

3.3 Summary

My analysis suggests that in most cases, if not all, that compensation for extinguishment of, or impairment or damage to, native title paid pursuant to a Federal Court determination (or deemed determination) will not be assessable either as ordinary income or CGT. This is subject, however, to the Commissioner's willingness to link the compensation payment to the underlying asset pursuant to Taxation Ruling TR 95/35 rather than to a statutory right arising under the NTA, particularly where native title has not been extinguished but merely impaired or damaged. If not, it is possible that CGT may arise by virtue of the disposal of a statutory right to compensation acquired by the native title holders under the NTA.

There is also the possibility of native title losing its pre-1985 status by virtue of provisions such as s 160ZZS/Div 149, s 160X/Div 128, or even pursuant to the recent High Court decision in Murry if the native title changes significantly in content.

Concerning future compensation payments, if they proceed, the amendments announced on 13 February 1998 will ensure that compensation for extinguishment of native title after the date of Royal Assent will be exempt from income tax and CGT, while compensation for impairment or damage to native title will be subject only to a 4% withholding tax.

Warren Black has been employed at Healy Pynt Solicitors since February 1999, after working at the Australian Taxation Office for 10 years. He practises primarily in tax but also does general commercial work. Warren also conducts seminars on the GST and other tax matters.

Warren has degrees in Commerce and Law from the University of Western Australia, graduating in law with first class honours. His honours thesis was on The Tax Implications of Native Title Compensation Payments, for which he received the Mallesons Stephen Jaques prize.

[1] Under the NTA, 1 January 1994 is the starting date which applies for executive grants by the Government. 1 July 1993 is the relevant starting date for legislative acts by a government.

[2] A determination arises by a decision of the Federal Court or by agreement by the parties.

[3] In announcing the proposed amendments, the Treasurer stated that although compensation for extinguishment of native title will usually be exempt from tax, there are some circumstances where this may not be the case, eg, payment on ongoing payments under a mining agreement or transfer of native title to a body corporate pursuant to the NTA. These issues are discussed further in my thesis "The Tax Implications of Native Title Compensation Payments", Faculty of Law, University of Western Australia (unpublished).

[4] The proposal to impose a 4% withholding tax follows the present income tax regime in place for payments by mining companies to Aboriginal communities under the Northern Territory Aboriginal Land Rights Act 1976 (see s 128U of the Income Tax Assessment Act 1936 ("ITAA36")).

[5] [1992] HCA 23; (1992) 107 ALR 1 ("Mabo No 2").

[6] Mason CJ, McHugh, Brennan, Deane, Gaudron & Toohey JJ, with Dawson J dissenting.

[7] NTA, s 223(1). See also NTA, s 223(1), Mabo No 2 [1992] HCA 23; (1992) 107 ALR 1, 42.

[8] Mabo No 2 [1992] HCA 23; (1992) 107 ALR 1, 51, principles 4 & 5 (per Brennan J; Mason CJ and McHugh J concurring; Deane, Gaudron and Toohey JJ dissenting). Note also that there has been a suggestion by a University of Western Australia Lecturer in Property Law and Native Title, Richard Bartlett (who is a leading commentator in this area) that in the subsequent High Court decision in Wik Peoples v Qld (1996) 141 ALR 129, the majority (Toohey, Gaudron, Gummow and Kirby JJ) preferred the minority view in Mabo No 2 that only a clear and plain legislative intention could extinguish native title, not an inconsistent grant by the executive. But this issue is unclear at the present time, and it is not necessary to analyse it in detail for the purposes of this thesis.

[9] The date of assent of the Racial Discrimination Act 1975.

[10] Mabo No 2 [1992] HCA 23; (1992) 107 ALR 1, 51, principle 6.

[11] For example, using land to carry on traditional customs, ceremonies and obtain traditional sustenance from hunting, gathering & fishing; Delgamuukw (10 Dec 1997 unreported), decision of the Full Supreme Court of Canada.

[12] Mabo No 2 [1992] HCA 23; (1992) 107 ALR 1, 65-66 (per Deane & Gaudron JJ). See also Delgamuukw (10 Dec 1997 unreported) where Lamer CJ at paras 138-139 described native title as "falling on a spectrum in relation to the degree of connection with the land".

[13] For example, Mabo No 2 [1992] HCA 23; (1992) 107 ALR 1, 66 (per Deane & Gaudron JJ), Delgamuukw (10 Dec 1997 unreported), paras 113 and 130, although in making their order, the High Court in Mabo No 2 held that the Meriam people were entitled to exclusive possession and occupation as against the whole world, that is, virtually equivalent to beneficial ownership; see Mabo No 2 [1992] HCA 23; (1992) 107 ALR 1, 56 (per Brennan J) and at 90 (per Deane & Gaudron JJ).

[14] Mabo No 2 [1992] HCA 23; (1992) 107 ALR 1, 51-52 (per Brennan J) and 66 (per Deane & Gaudron JJ). For example, alienation can occur if the traditional laws and customs permit it upon death or marriage. See also the recently enacted Indigenous Land Use Agreement provisions; NTA, ss 24BA-DM, where mechanisms are set up to enable native title holders to alienate their native title rights and interests to the Crown.

[15] This is discussed in more detail later in this Chapter.

[16] Mabo No 2 [1992] HCA 23; (1992) 107 ALR 1, 43 (per Brennan J).

[17] See for example Mabo No 2 [1992] HCA 23; (1992) 107 ALR 1, 146-147 (per Toohey J), who said "presence" on the land was required. Although he recognised the quality of "presence" required was governed by the demands of the land and native title group or community in question, he said there must be occupancy of some kind, and that "traditional title is rooted in physical presence".

[18] See for example Re Waanyi People's Native Title Application (1995) 129 ALR 118, 134 (per French J).

[19] The majority consisted of Mason CJ & McHugh J (Brennan J concurring) and Dawson J (who held native title did not exist).

[20] In Mabo No 1 (1988) 83 ALR 14, the High Court held s 10 of the RDA was breached when Queensland passed legislation extinguishing the native title rights of the Meriam people.

[21] 31 December 1993 is only for executive grants by the Government; for legislative acts, 30 June 1993 is the relevant date.

[22] NTA, s 14.

[23] NTA, ss 17-20.

[24] NTA, s 228.

[25] 30 June 1993 for legislative acts.

[26] NTA, s 24MD.

[27] NTA, s 233.

[28] In July 1998, the amendments to the NTA introduced another category of acts; "intermediate period acts". These cover certain acts, mainly pastoral leases, between 1 January 1994 and 10 December 1996 (that is, the date the Wik decision was handed down). However, they are irrelevant for purposes of this thesis as they do not encompass pastoral leases and therefore, will not be considered in detail.

[29] Legislative acts are acts of a Parliament, eg, acts by a Commonwealth, State or Territory Government in passing an Act of Parliament, or an amendment thereto, eg, amendments to the Mining Act 1978 (WA).

[30] Executive grants are acts by an Executive Government, eg, granting a mining tenement.

[31] As already mentioned above, 31 December 1993 is only for executive grants; 30 June 1993 is the relevant date for legislative acts by the Government. Furthermore, this is also subject to NTA, s 228 exceptions in relation to certain post-31 December 1993 acts.

[32] Known as a "past act". See NTA, s 226 definition of "act" and NTA, s 228 definition of "past act".

[33] NTA, s 15 distinguishes between the different categories of acts and their impact on native title.

[34] For example, commercial, agricultural, pastoral or residential leases.

[35] NTA, ss 15(1)(a), 229 - known as "Category A Past Acts". Although in respect of public works, they only extinguish native title in relation to the land or waters on which the public work concerned was or is situated; NTA, s15(1)(b)(i).

[36] NTA, ss 15(1)(b), 230 - known as "Category B Past Acts".

[37] NTA, ss 15(1)(c), 231 - known as "Category C Past Acts". Mining leases essentially cover all mining tenements under the Mining and Petroleum Acts of the various States; NTA, ss 242(2) and 245.

[38] NTA, ss 15(1)(d), 232 - known as "Category D Past Acts".

[39] NTA, s 238. This is known as the "non-extinguishment principle".

[40] This is the NTA, s 233 definition of "future act". Furthermore, as mentioned above, the date is 1 July 1993 for legislative acts; 1 January 1994 only applies for executive grants.

[41] NTA, s 235(2).

[42] NTA, ss 24MA and 24MB.

[43] The exact word used is "ordinary title". However, this is defined in NTA, s 253 to mean freehold in all States except the ACT.

[44] NTA, s 235(3).

[45] NTA, ss 24MD(3) and 238 - the "non-extinguishment" principle.

[46] NTA, s 24MD(2).

[47] Agreements are discussed further in Part (e) of 2.4.3 below.

[48] NTA, s 17(1).

[49] NTA, ss 17(2)-(3) and 20.

[50] NTA, s 235(6).

[51] NTA, s 24NA.

[52] NTA, s 24MD(2)-(3).

[53] NTA, s 24MD(2). Note compulsory acquisitions are the only future acts resulting in extinguishment of native title under the NTA (unless parties enter into agreements to extinguish native title under the right to negotiate in the Indigenous Land Use Agreements provisions or by agreements outside the NTA).

[54] These are known as "low impact future acts"; NTA, s 24LA.

[55] NTA, s 51(1). Furthermore, if the act results in an acquisition of property and Div 5 does not result in just terms, the NTA ensures that native title holders will receive additional compensation to ensure they receive just terms (as required under the Commonwealth Constitution); NTA, ss 18, 53.

[56] That is, freehold, except in the ACT; NTA, s 253.

[57] NTA, s51(2)-(3). For example, the Mining Act 1978 (WA) provides for compensation to freehold owners where their title is affected by the grant of a mining tenement. Therefore, the Federal Court could use the principles and criteria of the Mining Act in determining compensation.

[58] 1 July 1993 for legislative acts.

[59] NTA, ss 17(4), 24MD(4)(a).

[60] NTA, ss 20, 24MD(4)(b).

[61] With mining leases, for example, they are usually granted by the State and therefore, it is the State which is liable to pay compensation.

[62] NTA, ss24MD(4)(a)(i), s24MD(4)(b)(i). An example would be the imposition of a levy on the mining industry.

[63] NTA, s 51(5).

[64] NTA, ss51(6), 79. Note that despite the use of the word "request", the effect of s 51(5)-(6) is that this can only occur with the consent of both parties, that is, through a negotiated agreement which is then given effect as a determination of the Federal Court.

[65] NTA, s 51(8).

[66] NTA, s 38, also implied from NTA, s 51.

[67] Discussed further in W Black, "Part 2: The Tax Implications of Negotiated Mining Agreements" (1999) 2 The Tax Specialist 230.

[68] NTA, ss 48, 50(1)-(2) and 61(1).

[69] NTA, s 63.

[70] Since the July 1998 amendments, native title claimants must satisfy a threshold test before their claims can be registered on he Native Title Register; ss 190A-190C.

[71] NTA, s 66(1). As well as the native title holders and body corporates, a number of other parties, such as the relevant Minister and local government bodies, must be notified of the claim.

[72] NTA, 66(10).

[73] NTA, s 86G.

[74] NTA, s 87. For example, the agreement may cover issues such as existence of native title and the terms for paying compensation.

[75] NTA, ss 86A-86B.

[76] NTA, s 86C.

[77] NTA, s 94.

[78] NTA, ss 86A-86B.

[79] NTA, s 87.

[80] Based on discussions with Tanya Heaslipp, Chamber of Mines Solicitor (WA). In future, however, such agreements will be less likely to occur because of the removal of the right to negotiate.

[81] "Area Agreements" NTA, ss 24CA-24CL.

[82] "Body corporate Agreements" NTA, ss24BA-BI.

[83] NTA, ss 24BB and s24CB. For example, the agreement can authorise future activities such as mining. They can even specify the procedure or framework for making future agreements about matters relevant to native title rights and interests; NTA, ss 24DA-s24DM.

[84] NTA, ss 24BE(1) and 24CE(1).

[85] NTA, ss 24BE(2) and 24CE(2).

[86] For example, if a government wants to grant a mining tenement, it must go through an extended process involving the issue of notice to relevant parties (NTA, s 29) and provide the opportunity for Aboriginal groups to lodge claims (NTA, ss 28, 30). After this, the government and relevant grantee parties must negotiate in good faith (NTA, s 31), and only if there is no agreement within a 6 month period can the matter go before the arbitral body (that is, National Native Title Tribunal ("NNTT") or relevant State body) for a determination whether the act can go ahead (NTA, ss 35-36).

[87] Native Title Agreements", a paper published for the Neville Stanley Scholarship in 1997-98 by Sonya Gorman, UWA Law Student.

[88] For example, certain exploration and prospecting grants (NTA, s 26A), gold & tin mining (NTA, s 26B) and opal and gem mining (NTA, s 26C) are now excluded from the right to negotiate.

[89] NTA, s 26(2)(f).

[90] Under the NTA, the States have the options to put in place alternative procedures. At the time of writing, however, the States have not yet enacted any legislation. It is expected they will put in place in alternative regimes, however, if not, the provisions of ss25-44 apply with the NNTT being the arbitral body.

[91] The threshold test was tightened because previously, native title claims could be registered without any examination as to their merit. NTA, ss190A-190C now ensure that native title claims must be scrutinised to prevent frivolous or unlikely claims being entered on the Native Title Register. The effect of this is to reduce the incentive for mining companies and other grantee parties to enter into agreements because the delays to mining projects will significantly diminish.

[92] 30 June 1993 for legislative acts by governments.

[93] [1935] NSWStRp 9; (1935) 3 ATD 142.

[94] Ibid 144-145.

[95] [1966] HCA 48; (1966) 117 CLR 514, 526.

[96] (1922) 12 TC 427 ("Glenboig Union Fireclay").

[97] Ibid 456.

[98] See eg, Federal Coke Coy Pty Ltd v FC of T 77 ATC 4255.

[99] For example, NTA, ss 51(3) and 240 allow the principles of relevant legislation to be taken into account in calculating compensation. If a statute provided compensation using estimated profits or the like (eg, the Mining Act provides royalties for private mineral owners whose minerals are exploited), the compensation would still be non-assessable if paid for impairment or damage to native title.

[100] ITAA36, s 160A; ITAA97, s 108-5.

[101] Hereinafter referred to as "post-1985".

[102] The time of European sovereignty in Australia.

[103] A transfer may occur post-1985 pursuant to the NTA requirement (s 56) that native title be vested in a prescribed body corporate. As outlined in Chapter 4 of my thesis, above n 3, such a transfer will result in the application of CGT.

[104] ITAA36, s 160ZZS; ITAA97, Div 149.

[105] That is, if there are 100 native title holders in a community, each holder will hold a 1/100th share of native title.

[106] ITAA36, s 160X(5); ITAA97, s 128-15.

[107] Obviously, this is why the Treasurer has decided to exempt compensation payments from income tax in exchange for a withholding tax at source!

[108] 98 ATC 4585 ("Murry").

[109] ITAA36, s 160ZZR; ITAA97, s 128-250.

[110] Murry 98 ATC 4585, 4594-4595. The example given by the majority was hotels in the inner suburbs of Sydney which originally drew their custom from local business but later on, started marketing themselves to a broader geographical area. The majority said that in this situation, the original goodwill resulted from local custom but was now based on a much broader custom and therefore, it could no longer be said to be the same business.

[111] In particular, this could occur if native title holders have engaged in commercial exploitation of their native title since Mabo (or do so in the future if the proposed amendments are delayed for any length of time).

[112] Hereinafter referred to as "the Commissioner".

[113] That is, despite the proposed amendments not being retrospective, the Government may not see it as politically acceptable (nor administratively feasible) for the tax to be pursued in these situations.

[114] ITAA36, s 160ZZS(1); ITAA97, s 149-30.

[115] ITAA36, s 160ZZRR; ITAA97, s 149-15.

[116] It should be noted that the phrase "beneficial interests" has caused some concern because technically, the shareholders of a company have no beneficial interest in the company's assets; Charles v FC of T [1954] HCA 16; (1954) 90 CLR 598. The effect of this is that s 160ZZS (Div 149) could never be satisfied! However, the Commissioner has accepted that the expression has a special meaning in the context of s 160ZZS (Div 149) and therefore, we can look through to the underlying shareholders for the purpose of considering whether s 160ZZS (Div 149) is satisfied.

[117] ITAA36, s 6(1); ITAA97, s 995-1 defines "company" to include an unincorporated association. The reasoning is contained in Chapter 4 of my thesis, above n 3.

[118] [1992] HCA 23; (1993) 107 ALR 1.

[119] ITAA36, s 160ZZRU; ITAA97, s 149-30(3) specifically deems the new "holder" of the interest to hold the percentage of the dead person.

[120] ITAA36, s 160ZZS(1A); ITAA97, s 149-35(2).

[121] And most likely the Commissioner as well!

[122] Because, as already noted, the proposed amendments are not going to be retrospective.

[123] ITAA36, s 160A(1); ITAA97, s 108-5.

[124] See eg, Naval and Military Airforce Club of SA v F C of T [1994] FCA 1123; (1994) 122 ALR 201, Davenport v Chilvers [1983] STC 426. Furthermore, the Explanatory Memorandum to the 1992 amendments to s 160A contained in Taxation Laws Amendment Bill (No. 7) (1992), specifically recognised that a statutory right to payment would fall within the definition. This would be supported by the broad wording of ITAA36, s 160A; ITAA97, s 108-5.

[125] Although it is arguable compensation is payable under the RDA for acts before 1 January 1994, in which case the right to compensation also arises under that Act, s 45 of the NTA makes it clear that compensation is to be determined under s 50 of the NTA as if the entitlement arose under the NTA, irrespective of the RDA.

[126] NTA, ss 17 and 24MD.

[127] Subject to the findings in s 24(A) above.

[128] 92 ATC 4644.

[129] See also C Bevan, "Allowing for CGT Liability in the Assessment of Damages" (1993) Taxation in Australia (Red Edition) 19, who suggests a similar view.

[130] [1985] 58 TC 371 ("Zim Properties").

[131] Paragraph 3 defines "underlying asset" as the asset which has been disposed of or permanently damaged or reduced in value.

[132] At para 82. Essentially "direct & substantial link" means the happening or event resulting in the compensation must have caused the loss or damage, etc.

[133] At para 71.

[134] 96 ATC 4520 ("Guy").

[135] It was held to be exempt under the sole & principal residence exemption (ITAA36, s 160ZZQ; ITAA97, Subdiv 118-B).

[136] See above n 48.

[137] See above n 52.

[138] 1 July 1993 for legislative acts.

[139] See R O'Connor and J Hockley, "Native Title Payments : Tax Implications - Part 2 Assessability" (1997) 24(11) Brief 15 who argue that Taxation Ruling TR 95/35 will result in native title compensation for extinguishment of native title will be exempt from CGT.

[140] That is, Category C acts (such as mining leases), or Category D acts (all other acts).

[141] NTA, s 238.

[142] NTA, s 235(6).

[143] As mentioned elsewhere in this article, this was due to the difficulties arising from the lack of a threshold test for the registration of native title claims, and the resulting delays caused by the right to negotiate.

[144] This is because the delays to mining companies in obtaining a mining tenement will be significantly reduced as the threshold test for registration of native title claims has been significantly strengthened.

[145] Barrett v FC of T [1968] HCA 59; (1968) 15 ATD 149; Nullaga Pastoral Co Pty Ltd v FC of T 78 ATC 4329. Note that on some occassions, the treatment of periodic or ongoing compensation payments will give rise to tax implications. This aspect is considered further in Chapter 3 of my thesis, above n 3.

[146] NTA, s 51(1).

[147] This includes agreements between the parties as to the terms of the determination pursuant to NTA, s 86.

[148] Under s 6-5 of the ITAA97.

[149] The underlying asset principle involves linking the compensation payment to the underlying asset (native title) rather than a right of compensation.

[150] See eg, W Scholtz, "CGT Masterclass Session 5 - The Commissioner Writes the Law - CGT, Damages and Legislation by Ruling", Business Law Education Centre.

[151] Paragraphs 4-9 of Taxation Ruling TR 95/35, particularly para 6.

[152] Paragraph 3. Despite being a very broad approach, however, it is unlikely that Taxation Ruling TR 95/35 goes as far as UK Extra-Statutory Concession D33, which was released a few years after Zim Properties. There, the UK Inland Revenue Commissioner stated at para 9 that an underlying asset approach would be adopted where the taxpayer "suffered some loss or disadvantage in connection with the property", that is, all that is needed is a loss or disadvantage, while the Commissioner requires permanent impairment.

[153] 93 ATC 4293.

[154] 93 ATC 4418 ("Carborundum").

[155] This decision has not received great acceptance by the Commissioner or most commentators. Although most commentators accept that Harper J's view is what the law should be, they consider it is not what the law actually is.

[156] It is unclear whether this is compensable, since although it is recognised that native title can consist of a spiritual component since Walley v WA [1996] FCA 490; (1996) 137 ALR 561, there are no cases yet of which I am aware where compensation has been awarded and agreed for spiritual damage. In his paper "The National Native Title Tribunal: Compensation Issues - A Discussion Paper" (1995) Murdoch ELJ, Daniel Mah suggests compensation for spiritual damage will most likely be payable, but in my view, the issue remains unclear.

[157] See eg, Re Koara Peoples [1996] NNTTA 31; (1996) 132 FLR 73, where this occurred on the particular facts.

[158] At para 3.

[159] See Zim Properties, where Warner J seemed to suggest that in such situations, the relevant asset would be the statutory right of compensation as the underlying asset has not been disposed of. Furthermore, Scholtz, above n 150, suggests that a permanent reduction in value in these circumstances would more correctly relate to the disposal of a right to seek compensation for similar reasons.

[160] Admittedly, the Court's views were obiter dictum. However, Harper J in Carborundum also suggested that the correct approach in these situations was to look through to the underlying asset. On the facts of that case, he accepted there was no disposal, merely a loss in value, as the price paid was too much and therefore, CGT should not arise.

[161] J Sullivan, "Compensation and Damages Payments" 52, Taxation Institute of Australia, NSW Intesive Seminar, November 1994.

[162] ITAA36, s 160N; ITAA97, s 104-20 states that "the loss or destruction of part of an asset constitutes a disposal of that part of an asset, whether or not any amount of money or other consideration by way of compensation or otherwise is received as a result of or in respect of the loss or destruction."

[163] ITAA36, s 160R states nothing in Pt IIIA prevents the operation of part-disposals. Although the ITAA97 doesn't use the term "part disposal", s 108-5(2)(a) clearly recognises that part of an asset can be disposed of and uses the phrase "partial realisation".

[164] This question is not yet resolved in Australia. Although in a recent Federal Court decision Yamirr & Ors v NT & Ors (unreported July 1998 - the "Croker Island" case), Olney J indicated in obiter dictum that native title rights in relation to the offshore on the facts of the case did not extend to sub-surface rights (which would include minerals), but it is unclear whether this is indicative of the attitude of Australian courts.

[165] However, the argument is less strong here as the words "loss or destruction" imply a permanent (in the sense of everlasting) loss or destruction of the rights.

[166] Although Taxation Ruling TR 95/35 does leave open the possibility of part disposals, the Commissioner's view is that impairment of native title does not give rise to a part-disposal of native title.

[167] ITAA36, ss 160L and 160Z.

[168] ITAA97, s 108-5.

[169] McHugh J in Hepples v FC of T 91 ATC 4808, 4823 ("Hepples").

[170] Unless you could argue that the Crown (that is, Government) is a "person" who created the asset by enacting the NTA. However, such an argument is highly unlikely to be accepted by a court.

[171] See Allina Pty Ltd v FC of T 91 ATC 4195 and Congrieve v IRC [1946] 1 All ER 170, 183.

[172] Hepples 91 ATC 4808, 4823 (per McHugh J).

[173] ITAA97, s 102-20.

[174] ITAA36, s 109-5(1).

[175] See para 86-90, 153 of Taxation Ruling TR 95/35. And in a paper by G Cooper, "Key Issues for Personal Taxpayers" 9, ATAX University of New South Wales Conference on CGT, 31 July 1997, it is suggested that the words "occurrence of any event" in s 160M(2)(f) support this view.

[176] Unless the act is a legislative act, in which case it will be the date that the NTA is enacted, namely 24 December 1993 (it would not be 1 July 1993 because the NTA is not enacted until 24 December 1993 and therefore, nothing is vested in the native title holders until that date).

[177] 1 July 1993 for legislative acts by the Government. Note further that there is an alternative view that the right to compensation is only acquired upon the making of a determination by the Federal Court under Pt 3 of the NTA. With respect, I submit that the acquisition occurs before this point, as the right to compensation is triggered by the NTA's validation of pre-1 January 1994 acts which have affected native title. A determination by the Federal Court that native title exists and compensation is payable does not create native title nor a statutory right of compensation; it merely recognises its existence.

[178] Although as mentioned later on in this Chapter and in Chapter 3, this is subject to the possible effect of the High Court decision in FC of T v Orica Pty Ltd 98 ATC 4494. It is suggested later on in this Chapter by R Garvey and D Maloney, "Paper Profits, CGT & the Orica Decision", Taxation Institute of Australia presentation, 16 July 1998, that a possible effect of this decision is that s 160M takes priority over s 160U in relation to the timing of acquisitions and disposals under Pt IIIA. I amnot convinced however that this is correct on a strict reading of Pt IIIA, but indirectly, it does appear to be what the High Courtis saying.

[179] [1994] FCA 1123; (1994) 122 ALR 201.

[180] The NNTT (or State or Territory bodies where an alternative regime has been established).

[181] Before the July 1998 amendments, parties had to go through a right to negotiate to obtain a mining lease and if they could not agree, the relevant arbitral body (that is, the NNTT under the former provisions) would make a determination on whether it could go ahead; NTA, s 38. Although the amendments have significantly reduced the scope of the right to negotiate for mining, the right to negotiate is still significant for acts occurring before the amendments.

[182] NTA, s 24MD.

[183] NTA, s 227.

[184] See eg, Dann v State of WA [1997] FCA 332; (1997) 144 ALR 1 where the Federal Court held that the actual grant was the crucial issue, not the intention of the relevant mining company.

[185] See Harper J in Carborundum.

[186] See Scholtz, above n 150. It is also raised by the Commissioner as an alternative view of paras 159-163 of Taxation Ruling TR 95/35 without being accepted as correct.

[187] See J Morgan, "Capital Gains Tax and Damages - A Reality Check Nine Months after TR 95/35" 80, Taxation Institute of Australia, Victorian State Convention, September 1996.

[188] 98 ATC 4494 ("Orica").

[189] Ibid.

[190] At paras 64-65.

[191] Assuming, of course, there is no appeal.

[192] ITAA97, s 104-25(2).

[193] At para 158.

[194] Although technically it occurs when the judgment debt is obtained, the effect of taking View (2) is that it will be when the compensation is received.

[195] See s 160U(1). This is because in Taxation Ruling TR 94/29, the Commissioner accepts in practice there is no need for the native title holders to include the compensation in their return until the disposal occurs.

[196] NTA, s 87 treats settlement agreements under Pt 3 of the NTA as if they were a Federal Court determination.

[197] R Garvey & D Maloney, "Paper Profits, CGT and the Orica Decision", Taxation Institute of Australia presentation, 16 July 1998.

[198] Section 160U(1) states s 160U is "Subject to this Part".

[199] That is, the Commissioner does not have to go back a number of years and amend the return.

[200] ITAA36, s 160ZH(1); ITAA97, s 110-25.

[201] ITAA36, s 160ZH(1)(a).

[202] ITAA97, s 110-25(2).

[203] ITAA36, ss 160ZH(1)(b) and 160ZH(1)(e); ITAA97, s110-25(3). Section 110-25(3) also includes incidental costs that "relate" to the asset.

[204] See Dingwall v FC of T 95 ATC 4345 (per O'Loughlin J).

[205] In Taxation Ruling TR 95/35, the Commissioner does take a broad view of the words "paid or given" and at para 104, he states that it is enough if there is a "direct and substantial link" with the asset and therefore, a monetary loss in connection with a right to compensation can be included in the cost base. Here however, the loss is non-monetary and therefore, para 104 is inapplicable.

[206] This view is supported by Butterworths Australian Tax Practice Para 160A / 03100.15, which gives the example of a promise to marry.

[207] R Gordan, "When is a 'Right to Sue' a Taxable Asset?" (1993) 2(1) Taxation in Australia (Red Edition) 8.

[208] Currie v Misa [1875] UKLawRpExch 11; (1875) LR 10 Exch 153.

[209] That is, the market value of the loss or impairment to native title.

[210] Although this begs the question : How do you determine a market value consideration where the consideration cannot be valued?

[211] At para 114.

[212] That is, because the consideration will not exceed the market value of the right to compensation at the date of acquisition as required by s 160ZH(9)(c).

[213] Burswood Management Ltd v A-G (Cwth) [1990] FCA 203; (1990) 94 ALR 220.

[214] At para 157.

[215] The reason for this is that s 160K(3) deems a reference to "being entitled to receive money or property other than money" as referring to that person being entitled to receive the same immediately or at a future date. As a consequence, a judgment debt will constitute consideration.

[216] That is, either by grossing up the compensation or awarding an indemnity against the defendant; Taxation Ruling TR 95/35, paras 254-255.

[217] ITAA36, s 160ZD(2); ITAA97, s 116-30.

[218] Most commentators regard Harper J's comments as stating how Pt IIIA in respect of compensation should read rather than what it actually says.

[219] At para 119.

[220] NTA, s 94.

[221] At paras 83-85.

[222] See Example 3 at paras 266-268 of Taxation Ruling TR 95/35. In Example 3, part of the compensation relates to goodwill (and therefore is accepted as a permanent impairment) and part to loss of profits (and therefore relates to the right to seek compensation) and as a result, is apportioned accordingly.

[223] See ITAA36, ss 160ZH(5) and 160ZH(7).

[224] See CCH Australia Limited, Australian Capital Gains Tax - Principles & Practice (1992 ed) 35.

[225] See Example 3 at paras 266-268.

AustLII: Copyright Policy | Disclaimers | Privacy Policy | Feedback